Being greedy when others are fearful is an easy thing to say, but hard to do in real life. That’s because investing when others are running out the door takes a great amount of fortitude and conviction. But this also leads to potential for market-beating returns over the long run. This brings me to Camping World (NYSE:CWH) which is now well off its 52-week highs, and in this article, I highlight what makes the stock a potential buy, so let’s get started.
Camping World is the largest retailer of RV’s, and related products and services in the US. The company has an equity market cap of $2.0 billion, which is small for a company with such a large footprint (12% of the US RV market). The company also owns and operates Good Sam, the world’s largest RV club, with over 2 million members.
CWH benefits from favorable demographics in the US, with the baby boomer population aging, and more people taking up camping and RV’ing as a leisure activity. The company has also been investing in its brick and mortar store base, as well as its online presence. It now has over 185 locations across 42 states, and is expanding its online offerings.
Contrary to how the stock price has performed since the start of the year (a 38% decline), the business appears to be holding up well, with record $1.7 billion revenue generated during the first quarter, representing a 6.7% YoY increase. Moreover, CWH didn’t have to sacrifice pricing to achieve growth , as its gross margin improved by 23 bps YoY to 33.7%.
The company has also been growing its financing business, which helps customers finance their RV purchases. The financing business has grown at a compound annual rate of 20% over the last 5 years, and now comprises 20% of CWH’s total revenue. Notably, adjusted EBITDA declined by $7 million YoY to $182 million. This was, however, due to inventory rebalancing at distribution centers, and increased floor plans and new store openings.
Meanwhile, it appears that the company is set on returning capital to shareholders, as it repurchased 2.6 million shares on the open market, contributing to an impressive 5.4% share count reduction to 41.7 million shares on a sequential QoQ basis. Moreover, CWH recently hiked its dividend by 17% and is a high dividend stock with a 9.9% yield. Moreover, the dividend is protected by a 21% payout ratio.
Looking forward, CWH is a growth play, as it seeks to continue to expand through acquisitions. This includes its recent acquisition of Anthem RV in Arizona, which is a SuperCenter that offers new and used RVs from top manufacturers, RV accessories, and the entire portfolio of Good Sam products and services. This location will also complement CWH’s existing Arizona locations in Avondale, Mesa, and Tucson.
Risks to CWH include its somewhat leveraged balance sheet due to acquisitions and the growing nature of the company, as it comes with a net debt to EBITDA ratio of 3.8x. In addition, there are macroeconomic pressures from inflation, as RVs are a big ticket purchase for consumers. This is reflected by the fact that RV sales slumped by 31% YoY during the month of April. However, CWH benefits from a huge installed base for parts and services, as noted by CEO Marcus Lemonis during the recent conference call:
When we look at the macro factors that impact new RV sales, it’s easy to recognize the pressure, consumer confidence, inflation, rising interest rates, et cetera, but for us, it’s more complex than that.
When you study our business, it’s true that new RV sales are a big part of our company’s revenue. However, it’s also important to remember the other key areas that serve the installed base of RV-ers.
Based on retail data over the last several years, we believe the installed base of RV-ers grew by over 1 million in the last several years. The installed base feeds our high-margin service, collision and parts business, our recurring, steady and predictable Good Sam business, which happened to grow 9% quarter-over-quarter, and our used RV business, which was up over 35% in revenue.
As a management team, it’s our job to anticipate changes and adjust our business for them. The common discussion we have is, what would our business look like if the new RV sales retracted at different levels. We sensitize the model. If you make the assumption that revenue is the only factor in determining the variability of our business results, then this is often the guide that I use.
I see value in CWH at the current price of $25.30 with a forward PE of just 4.8x. While sell side analysts expect to see earnings declines over the next several quarters, there is potential for revisions as CWH has beaten top and bottom line estimates over the past 7 of 8 quarters.
With short interest representing 34.7% of the float, earnings surprises could result in a short squeeze. Sell side analysts have a consensus Buy rating on the stock with an average price target of $35.44. This equates to a potential one-year 40% return based on share price appreciation alone.
Camping World is a high dividend stock with a 9.9% yield that is set on returning capital to shareholders through buybacks and increased dividends. The company has a strong history of earnings beats, which could result in a short squeeze as 34.7% of the float is sold short. Meanwhile, it has a large installed base requiring parts and services, which could help buffer the effects of an industry downturn. For the reasons above, I view CWH as being a speculative buy for a well-diversified portfolio.